Savills City Office Market Watch: Over 1m sq ft of take-up in July due to high pre-letting

Savills has released its latest monthly report looking at the City occupational markets:

Take-up for July reached 1,026,352 sq ft across 29 deals, resulting in the total for the year reaching 3.5m sq ft, which is down on this point last year by 17%. However, this is the largest single month of take-up since August 2017 and is now up on the 10-year average take-up to the end of July by 2%. This brings the 12-month rolling total to 6.9m sq ft, of which 85% has been of a Grade A standard.

We expect to see take-up continue at this strong rate for the remainder of the year as there is currently just under 2m sq ft of space under offer, which is up on the long-term average by 51%.

The largest deal to complete in July saw BT Group pre-let the whole of One Braham Street, E1 equating to 328,011 sq ft, which is also the largest deal of the year so far. It is believed the telecommunications giant agreed a 15-year lease at a blended rent in the late £50s/sq ft. While the Starwood/Aldgate Developments scheme, which is due for completion in Q2 2020, is now entirely pre-let, there is a possibility that BT will bring a portion of the space back to the market available for sub-let.

Also in July, we saw Cooley acquire levels 22–24 at Twentytwo Bishopsgate, EC2 equating to 74,628 sq ft. This is now the sixth pre-let at the AXA scheme resulting in a total of 391,000 sq ft now being pre-let. It is believed there is an additional 360,000 sq ft of space currently under offer. Assuming all of these transactions complete prior to expected completion of the building in Q1 next year, that would result in the building being delivered to the market with approximately 59% pre-let.

At the end of July, the Insurance & Financial services sector has accounted for 21% of take-up. However, the Serviced Office sector continued their growth across London having also accounted for 21% of take-up so far this year. Last month saw three deals to WeWork alone equating to 84,026 sq ft, and IWG pre-let the whole of 68 King William Street, EC4 equating to 78,000 sq ft, which is the third largest deal this year to a serviced office provider.

Total City supply fell last month following the strong levels of take-up and currently stands at 6.4m sq ft, falling by 3% on the end of last month and equating to a vacancy rate of 5.0%, which is down on July 2018 by 30 bps, and down on the long-term average by 160 bps.

Last month saw five pre-completion lettings across the City equating to 591,000 sq ft or 58% of the month’s take-up. We have now seen 963,000 sq ft of pre-completion lettings deals this year equating to 28% of take-up. The high amount of pre-letting is a continuation of a trend we saw last year, where we saw a record number of pre-lets for over 50,000 sq ft.

Currently, we are anticipating 5.8m sq ft of new space to complete next year of which 24% has been pre-let, however, this increases to 34% if we include the space which is currently under offer. It is likely that we will still see the vacancy rate rise next year, although it should remain below the long-term average of 6.6%. Furthermore, supply will remain constrained beyond next year, as 2021 is only expected to see a total of 1.5m sq ft of speculative space complete, and 2022 currently has 2.3m sq ft of speculative space scheduled to complete. With pre-letting expected to continue at a strong rate, the City market should remain under-supplied for the foreseeable future, resulting in average rental growth of 2.2% per annum for the next five years.